1. Technical Field
The present disclosure is directed to systems, methods and articles to facilitate derivatives transactions.
2. Description of the Related Art
Derivatives are financial instruments whose value depends on—or derives from—certain external variables. Those variables may be underlying assets, such as stocks or commodities, or some other metric, such as weather, unemployment or an economic index, etc. Derivatives commonly take the form of contracts, such as futures, options or swaps.
Derivatives may be broadly categorized by (i) the relationship between the asset and the derivative (e.g., forwards, options, swaps), the type of underlying asset (e.g., equities, foreign exchange, interest rates, commodities), and (iii) the market or manner in which they trade or are transacted. Forwards are a contract to buy or sell an asset at a future date for a set price. Futures are similar to forwards, except standardized contracts are used and futures may be traded on exchanges. Options give a holder the right, but not the obligation, to buy or sell an asset. Swaps are contracts to exchange cash flows on or before a specified future date based on the underlying value of the external variable.
The major classes of underlying assets include interest rates, foreign exchange rates (currency), credit default, commodities, equity securities, etc.
Generally speaking, derivatives transactions may be purely speculative in nature or may be used for commercial risk management purposes, such as hedging transactions. Speculative derivatives transactions can take an almost infinite number of forms, and may greatly magnify gains and losses relative to a transaction in the underlying asset. Hedging transactions may improve the operations and profitability of an operating business.
Derivatives transactions typically are either exchange traded, or traded over-the-counter. Exchange trades generally use standardized contracts defined by the exchange, which acts as an intermediary in the transaction. Over-the-Counter (OTC) transactions are privately negotiated transactions directly between two parties with or without an intermediary, and are often of a non-standard type. OTC transactions are generally arranged by banks or other financial institutions.